Seniors stressed out about high prices for food, fuel and healthcare will notice they have more purchasing power in January, when Social Security checks go up 8.7%. But if the U.S. slips into a recession within the next year, as most economists predict, inflation could ease, and that permanent increase in benefits could feel even larger, at least for a while.

The Social Security Administration announced the biggest cost-of-living adjustment (COLA) in 40 years on Oct. 13, boosting the average retiree benefit $146 a month to $1,827 in 2023. That increase follows a 5.9% COLA for 2022.
The hefty increase in January is meant to offset high inflation, which clocked in at 8.2% in September, its seventh consecutive month at 8% or higher. But rising prices may have crested. According to the Federal Reserve’s most recent Summary of Economic Projections, inflation is expected to dip to 2.8% in 2023. Economists expect inflation to decline further to 2.3% in 2024 before returning to the Fed’s 2% target rate by the end of 2025. In a bad recession, prices likely would moderate further than that or even decline. Social Security never lowers benefits, so in a deflationary year, retirees would see their real income grow. But the increase wouldn’t be permanent. The government calculates the annual COLA using the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W, a subset of the broader Consumer Price Index. The 8.7% increase in January is based on the change in the CPI-W from the third quarter of the past year, according to the SSA. Retirees won’t get another COLA until prices increase above their current levels, even if that takes more than one year.

COLAs affect almost 70 million Americans who receive Social Security or Supplemental Security Income benefits. Amid high inflation rates, 43% of seniors say they have reduced their discretionary spending this year, according to a new survey from the Employee Benefit Research Institute. The poll found that 27% of seniors are spending more money each month than they can afford, up from 17% in 2020. The Federal Reserve has been raising interest rates to drive down demand for goods and services, and higher borrowing costs already have cooled the housing market. A recession would reduce consumer demand even more, slowing down inflation and potentially leading to price decreases for many products, according to Rob Williams, a managing director at the Schwab Center for Financial Research. Lower prices would mean more buying power for seniors until inflation picks up again, Williams said.

“These higher payments will continue,” he said, adding that if deflation occurs, seniors “could end up coming out ahead.” Of course, if a recession leads to deflation, that would result in lower COLAs in subsequent years as prices caught up. In fact, following the financial crisis, there were no COLAs given at the beginning of 2010 or 2011. The COLA that went into effect in January 2009 was 5.8%, the highest in 27 years, based on rising prices the previous year. So, as the economy fell apart late in 2008 and consumer demand decreased, seniors had more purchasing power, even though they would go two years without another raise in benefits, according to Dr. Jason Fichtner, senior fellow at the Alliance for Lifetime Income, which educates consumers about annuities. “It took two full years of slow inflation before you got back up to the point where a COLA was automatically required,” he said. “The COLA is locked in, so seniors got the cost-of-living increase while prices were dropping.”

A sharp drop in energy prices can quickly lower inflation. There also was no COLA at the beginning of 2016, largely due to falling gasoline prices, and the following year, it was only 0.3%. The U.S. last experienced a serious bout of widespread deflation during the Great Depression, when consumer prices fell 25% from 1929 to 1933, according to the Federal Reserve Bank of St. Louis. But Japan has had deflation for much of the past two decades.

Right now, of course, deflation is far from anyone’s mind with the U.S. experiencing its worst inflation in decades. The 8.7% COLA for 2023 should make a difference to millions of seniors. Overall, Social Security benefits represent about 30% of income for elderly Americans, according to an SSA fact sheet. That is the average. Many seniors are far more dependent on Social Security. Among elderly beneficiaries, 37% of men and 42% of women receive at least half of their income from Social Security, according to the SSA. For those seniors, next year’s COLA is significant, Fichtner said.“I do think people are going to notice it,” he said. “For people with budget constraints, living off Social Security or mostly off Social Security, that’s a significant increase. It’s going to help them pay the bills.” With interest rates rising, seniors who don’t need their COLA to pay for essentials should consider paying off credit-card debt, according to Connor Spiro, senior financial consultant for John Hancock. Alternatively, they could add to their rainy-day fund, recognizing that most seniors will face an unexpected expense at some point, he said.

The EBRI survey found that 69% of seniors had at least three months of emergency savings. “If they don’t have high-interest debt, they might want to increase the amount they’re saving and create a little buffer there,” Spiro said.

Kelly LaVigne, vice president of consumer insights at Allianz Life Insurance Co., says it is always wise to save a few extra bucks each month, especially with healthcare costs rising. He adds: “There’s always the idea that I don’t know how many more years I’ve got left, so I’m going to spend it. There are two schools of thought there.”

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